Don’t be scared to invest into Monster ($MNST) | Utradea

Investment Thesis:

  • There is a big opportunity for non-alcoholic beverage companies’ post-pandemic, with the demand of beverages from restaurants resurfacing as they go back to full capacity.
  • Given my valuation techniques, and the valuations of analysts, there is a broad consensus that Monster beverages is undervalued and presents a good buying opportunity.
  • Based off of the plan that I formulated near the end of this report there is a potential upside to an investment in Monster of 14.13%.

Company Information:

$MNST — Monster Beverages develops, markets, sells, and distributes their energy drink beverages under 32 different brand names, most notably Monster, Reign, and NOS.

  • Monster Energy Drinks
  • Strategic Brands
  • Other Brands

Investment Information:

Macroeconomic Outlook:

  1. Monster Energy Drinks: This segment consists of Monster’s Energy Drinks, Monster Espresso Energy Drinks, Monster Java Energy Drinks, Monster Coffee Energy Drinks, Monster Energy Teas, Monster Muscle, Monster Maxx, Monster Rehab and Monster Hydro. Furthermore, this segment also includes Reign Total Body Fuel, and Reign Inferno Energy.
  2. Strategic Brands: This segment includes BPM, BU, Burn, Full Throttle, Fury, Gladiator, Live+, Mother, Nalu, NOS, Play, Power Play, Predator, Relentless, Samurai, and Ultra Energy.
  3. Other Brands: This segment consists of AFF (American Fruits and Flavors) selling products to third-party customers.
  • Financial Performance (Good): Monster has increased their revenues by 9.47% YoY, their gross profit by 8.14%, net income by 27.26%, decreased their effective tax rate to 13.3% (from 21.7%), and has a 59.2% gross margin. Monster had a great financial performance in 2020, and is very profitable, which should generate some excitement among investors, increasing the demand for their stock.
  • Financial Performance (Bad): Monster’s cost of sales increased by 14.13% YoY, which is worrying given that the cost of sales increased more than actual sales (hurts margins), their gross profit decreased from 60% (2019) to 59.2% (2020), this was a result of the cost of sales increase mentioned above. Additionally, Monster’s sales in quarter 2 of 2020 were down by about 1%, this is understandable due to the uncertainty with COVID during this quarter.
  • Outstanding Options: Currently, Monster has 8,323,000 shares outstanding in options that can be exercised this year. If all of these options were to be converted into common shares and sold on the market, it would cause a dilutionary effect of 1.57%.
  • RSU’s and PSU’s (Restricted/Performance Stock Units): In 2021, Monster will have 947,000 RSU’s and PSU’s to award to their employees. If all of these units are vested in 2021, then it would cause a dilutionary effect of 0.18%.
  • March 2020 Repurchase Program: In March of 2020, Monster’s board of directors authorized a share repurchase program, that would allow the company to repurchase $500M worth of common stocks. In 2020 Monster repurchased $58.5M worth of shares and have $441.5M left to repurchase shares in the future. If Monster was to use all of this money to repurchase shares (which they tend to do within the year), then Monster will be repurchasing about 7,905,103 shares (at $55.85/share, which is the agreed upon price). If all of these shares were repurchased, then the existing shares will rise in value by about 1.5%.
  • Employee Stock Purchases: Monster’s employees repurchased 200,000 shares in 2020, inflating existing shares by approximately 0.04%.

Investment Valuation:

In order to properly value Monster Beverages, I decided to undergo a DCF model, and 3 comparable analyses.

Plan:

Any entrance into a position under the $92 mark helps to limit the downside, as it is below the low analyst price target.

Risks:

  • Financial Performance: Based off of their high valuation (when comparing their current price to the fair value I achieved in my DCF model), investors may be pricing in high earnings and growth. However, if Monster is not able to live up to this expected growth, then investors may dump their shares which will hurt the share price.
  • Share Dilution: As I stated in the “financial information” section of this report, Monster has a couple of different streams of potential share dilution. The main 2 forms of dilution in Monster are their outstanding options and their RSU’s/PSU’s, which can combine for a total dilutionary effect of 1.75%. This is not bad at all, as many companies exhibit way higher dilution, however it is something that investors should still pay mind to.

Catalysts:

  • Financial Performance: As previously stated, some investors may be pricing in good financial performance from Monster. However, if they are able to outperform these optimistic estimates, then their share price will soar. This can be seen through their Q2 2020 financial performance, as they beat earnings by a fair amount, and as a result their share price jumped by over 6.5%.
  • Share Repurchase: Monster has previously repurchased their shares, which is good to see as an investor. This is not expected to change anytime soon as monster has authorized $441M in share buybacks through their March 2020 repurchase program. Additionally, employees have the option to buy back shares as well. In total, Monster has the ability to repurchase over 8.1M shares, which will increase the value of the existing shares by 1.54%. This repurchasing can offset majority of the effects of their dilution and makes the share dilution less of a risk. This should help limit the risk for potential investors and entice them into entering a position.
  • Re-opening: Reopening could help Monster to drive their sales as it is likely that they will start to notice higher demand from restaurants as they start to re-open and reach full capacity. This increased demand can help Monster to grow their sales hugely if Monster can find a way to keep their at-home sales up.